Another Pivotal Level Felled by the Mighty Bull

by Tyler Craig | March 15, 2012 9:40 am

Tuesday’s Fed-induced rally propelled the Dow Jones Industrial Average firmly above the pivotal 13,000 level. Not to be outdone, the Standard and Poor’s 500 Index also breached a key resistance zone at 1,375 that had effectively put a lid on the Index last year. Finally, the tech heavy Nasdaq Composite, which has been leading the charge higher and already exceeded both last year and 2007’s high, breached the 3,000 level.

With all the bullish chest thumping surrounding these noteworthy breakouts, what’s the appropriate response for the everyday trader? Is this an all-clear signal to back up the truck and load up on equities, or the last gasp of a dying bull? Rather than making overly bullish or bearish prognostications, suppose we highlight a few key principles to help you assess the situation.

1. One of the bedrock pillars of technical analysis is that a trend in motion stays in motion. Since the genesis of our current uptrend late last year, every resistance level has fallen victim to the relentless buying that has been part and parcel of this bull trend.

Traders shouldn’t be surprised, then, when yet another ceiling (such as 13K on the Dow), is breached. Until we see sufficient evidence to the contrary, consider giving the market the benefit of the doubt as it moves higher.

2. Breaching pivotal resistance levels serves to strengthen the existing trend. In addition to creating a psychological boost and lifting investor sentiment, breakouts also increase the imbalance between demand and supply.

As resistance fails, wounded short-sellers run for cover while emboldened bulls who were previously sitting on the sidelines buy-in. This lift in demand explains some of the dynamics that contributed to Tuesday’s monster run and may continue to propel stock prices higher going forward.

At the end of the day, these recent breakouts have to be looked at as bullish developments. But then again, the market has been quite bullish for months now so it’s not as if this is some game changer from left field.

At the time of this writing, Tyler Craig had no positions on any of the aforementioned securities.